Russ Roberts interviews Lawrence H. White

Over the years I’ve sometimes complained about “internet Austrians.”  Larry White, who teaches at George Mason University, is definitely not an internet Austrian. Russ Roberts at Econtalk has a very good podcast interview of Larry (designated “guest”), and also provides a written summary (I’m not sure if it’s exactly verbatim.)  Here’s the portion on GDP targeting that starts a bit after the 40 minute mark:

Guest: Many constraints are better than no constraint. And so, a popular constraint which a lot of central banks have adopted in the last 30 years is an inflation target. And it seems to me that that’s better than no constraint. And the Fed has adopted an inflation target now, explicitly; except that the Fed adopted it, rather than Congress imposing it on the Fed. So the Fed could abandon it at any time. It’s not a constraint in the same way as a legislatively- or Constitutionally even better-imposed constraint. But I’m persuaded by arguments in the volume and elsewhere that as far as fastening a rule on the Fed, a nominal income rule would be better, one that says– Russ:Explain how that would work. Guest: Yeah. So, what the Fed should be concerned about is the total amount of spending in the economy, not just the stock of money and not just the price level. Guest: And not the interest rate or the overnight Federal Funds rate. Guest: Certainly not interest rates, that’s right. But what that would mean is if there isn’t any additional hoarding going on, or any dishoarding going on, then the Fed just pursues even money growth. But if people want to, for whatever reason, want to hold money–they want to hold more money balances relative to their spending, then the Fed should supply the additional money that people want to hold, because the alternative is that spending drops off; and that has real repercussions that we’re better off avoiding. It’s true that if the price level adjusted instantly, the market would clear– Russ:It would be irrelevant– Guest: and we’d be fine. But prices are sticky, I think is a fact about the world we are living in. Russ: Well, and information is imperfect. A bunch of people show up at your store; you don’t know if they are there because they have more money in their pocket or less desire to hoard money, keep money, or whether your product is really great. So you could make a lot of real mistakes in the short run– Guest: That’s right– Russ: trying to figure out what’s going on. You can’t ever figure out what’s going on. So you will inevitably make mistakes. So, the argument I think is it would be better if what I saw coming into my store was real rather than nominal–that would be one way to put it, right?Guest: That’s right. And actually stabilizing nominal income is a better way of reducing that signaling problem that people have, that sellers of goods have, than stabilizing the price level. So, some people who want to stabilize the price level acknowledge this in the case of an adverse supply shock. So, there’s an oil price rise, let’s say, and the United States is an oil-importing country. The price of oil goes up; the price of gasoline goes up; the price of things made with oil go up. If you want to stabilize the price level, you have to push other prices down so that the average level of prices doesn’t rise. But the rise in the price of things made with oil is providing information. It’s not clear why you want to cloud that information by pushing other prices down, because that means a tight monetary policy, tighter than people expected. Russ: At least in the short run. Guest: So you’re hitting the economy with a double whammy. It’s got a real shock and now it’s got a monetary shock on top of that. Both of them negative. And some people who favor a stable price level will say, ‘Okay, yeah, we grant it in that case.’ But then they should also grant it in the other case. If you have an increase in the productivity of the economy, either a positive supply shock or improvements in technology, improvements in labor productivity or total factor productivity, you should let the prices of those particular goods that are now being produced more cheaply, let those prices fall. Don’t try to offset that by raising other prices. Russ:Is that going to happen naturally? An oil price shock doesn’t cause inflation; the Fed wouldn’t have to do anything. Or are you talking about in the short run, when the signals are confused, right? Guest: Yeah. Russ: Those prices are going to have to fall–the Fed doesn’t have to drive down the other prices. They are going to go down anyway, on their own, right? Guest: Oh. Eventually they’ll go down on their own if people are spending more on oil. Russ: Yeah. Guest: Depends on the elasticity of demand for oil. But if they are spending more on oil, right–they’ll be spending less on other things. Russ: So the Fed wouldn’t intervene there. To me, the issue is just measuring price indices accurately in a time where we are blessed to live, where quality is changing every day. Every day, almost, the world is getting better and the products are getting better. And so assessing what’s actually happening, the overall price level, seems to be much more difficult than it was 25, 50 years ago, when the economy was much more static. So to me the question is, given that uncertainty, that measurement uncertainty, is nominal GDP (Gross Domestic Product) targeting–are they going to be better? I’m not sure. I’m not sure it makes any difference. I’m not sure that really gets around that. Guest: Yeah, it actually is easier on that score, because you don’t need to know the right price index to do it. Russ: You don’t need to, but the question is are you still–are you doing the right thing? Guest: Yeah. I think for the reasons we talked about earlier. It is a problem if you want to stabilize the price level that you have to take account of quality changes, and that’s difficult. There are all kinds of, as you’ve been saying, quality changes that goods experience. So, if it’s a simple thing like your tire lasts 60,000 miles instead of 40,000 miles, you can make an adjustment. But what if it gives you a better ride? How do you adjust for that? Russ: What if it has a microwave oven in it? While you’re driving along? How do you weight that? Guest: So, some people are under the misapprehension that it’s harder to stabilize or to target nominal income because it’s the product of real income and the price level. But that’s actually not how it works. First the statistical authorities gather information on nominal income and then they derivereal income by dividing by a price level. Russ: Which they also have to derive.Guest: Which they have to construct by going out with clipboards and writing down prices and then trying to make adjustments for quality changes. So you save yourself that trouble if you are just looking at total spending.

Notice Larry’s emphasis on the symmetry in the argument that NGDP targeting is better than price level targeting.  This suggests that there are times where you want to undershoot the average inflation rate because productivity is growing fast. His comments can be seen (I think) as an implied criticism of Paul Krugman’s recent claim that monetary policy was not too easy in the late 1990s, as inflation was pretty much on target. I don’t think money was far too easy at that time, but given the very strong productivity growth during the tech boom, somewhat tighter money would have been appropriate, and of course easier money in 2008 when oil prices soared but NGDP did poorly.

HT:  Michael Byrnes

Clear thinking about taxes

It’s clear from my comment sections that people just don’t understand taxes.  In this post I’ll try to explain a few basic concepts, so that we can have an intelligent discussion.

The biggest confusion is that people don’t understand why capital income should not be taxed, and why a wage tax is equivalent to a consumption tax.  Consider someone with $100,000 in income, who can choose to consume, or invest in a fund that will double in value over 20 years.  Suppose we want to raise revenue with a present value of $20,000, from this person.  We could have a wage tax of 20%, and raise $20,000 right now.  Let’s also assume that this person decided to spend 1/2 of his after-tax income—leading to $40,000 in consumption today, and save the other $40,000, leading to $80,000 in consumption in 20 years.  Note that both current and future consumption are reduced by 20% relative to the no tax case.

Alternatively, we could directly tax consumption at the same rate (say with a VAT). Let’s assume the person saved $50,000 and spent $50,000 on consumer goods.  After paying VAT they consume $40,000 today, and the government gets the other $10,000. After 20 years the $50,000 saved turns into $100,000, but you must pay $20,000 in VAT, leaving consumption of $80,000.  Exactly the same as with a wage tax.  The total revenue to the government looks bigger, but is the same in present value terms.

In contrast, an income tax doubles taxes the money saved, once as wages, and again as capital income.  So now it’s $40,000 consumption this year, and only $72,000 in 20 years ($80,000 minus 20% tax on the $40,000 in investment income), an effective tax rate of 28% on future consumption.  And of course with inflation the effective real tax rate is still higher.  Income taxes make no sense at all; if you want progressivity, tax big consumption more than little consumption.

People also get confused when we try to link these abstract concepts to real world aspects of the tax code, like IRAs and depreciation.  Consider the wage tax and the VAT tax discussed above:

1.  Wage tax = Roth IRA with no restrictions–pay when you earn

2.  VAT = 401K with no restrictions–pay when you spend

An unlimited Roth IRA would allow you to put all of your savings into IRAs, as would an unlimited 401k.  And you would not be forced to withdraw at retirement–you could have your heirs spend the money, and pay the tax.

What about depreciation?  Why should capital investment be expensed?  The IRAs I just discussed are financial investments.  But we know that saving equals investment, so there is a corresponding physical activity associated with financial saving.  Consider a simple example:

A utility spends $1 billion on a huge solar facility in the desert.  For simplicity assume they can sell $100,000,000 in electricity each year, and there are no there costs.  If we treated this like the 401k, the utility would deduct the expense of the initial construction from its current taxable income, just as you deduct money you put into a 401k.  But then they’d have to pay taxes on the full $100 million in annual revenue (unless reinvested), just as you must pay taxes on the full cash flow of your 401k (unless reinvested).  If the utility later sells the solar facility to another company, obviously the full sales price is taxable, just as money you withdraw from a 401k is fully taxable.

Note that even though you pay tax on money you withdraw from a 401k, this is not a tax on capital income; it is a deferred tax on labor income.

In principle, you could tax consumption, or you could tax all of GDP.  We’ve adopted a weird intermediate scheme, to tax GDP minus depreciation, sometimes called net income.  If there’s a rationale for this I’d love to hear it.  Now of course we don’t actually deduct depreciation, as it’s hard to know how fast assets are deteriorating in value, so we simply make up numbers, like a sliding 30-year depreciation schedule.  This is lots of busywork for accountants, with no practical value that I’m aware of.  I can think of two things that accountants might be interested in:

1.  Cash flow

2.  Value of a company’s assets

The later might involve “depreciation,” but it might just as well involve “appreciation,” especially in real estate.

If you allow companies to expense all investments, then you have essentially turned an income tax into a consumption tax.  (Unless I’m mistaken, that’s what Rubio/Lee is trying to do.)  If you allow no write-offs of depreciation at all, then you have a tax on GDP, or gross income.

I get hit from both the left and the right, both sides making errors:

1.  The left complains my proposal is too regressive, as it LOOKS LIKE income taxes would hit heavy saving rich guys more than a consumption tax.  But people only absorb the burden of a tax to the extent that it reduces their consumption.  If Bill Gates pays an extra $10 billion in taxes, and doesn’t reduce his consumption, but instead gives $10 billion less to the poor in Africa, then he hasn’t really absorbed the burden of this tax. Look, a country can’t consume more than it consumes.  Does anyone disagree with that?  But lots of liberals believe in the following combination of statements, which is logically impossible:

1.  Most Americans live right on the edge, consuming all their income.

2.  Rich fat cats have lots of extra income they don’t need, which could be given to average Americans.

3.  Lots of redistribution would not hurt investment.  OK, that means it won’t boost consumption.

4.  Even paying lots more taxes, the rich would consume almost as much.

So if the rich consume almost as much, and total consumption doesn’t change, how are the rest of us helped?  If all those things are true then it’s logically impossible for the average people to be better off, as we’ve assumed they consume all their income, and you’ve told me that aggregate consumption and investment don’t change.  Liberals simply aren’t thinking clearly about the true burden of taxation.  Gates and Buffett aren’t bearing the burden of the taxes they do pay, someone else is.

From now on liberal commenters must tell me why so many brilliant liberal economists have favored replacing income taxes with progressive consumption taxes, and what’s wrong with this argument.  If that can’t do so, I won’t respond to their complaints.

2.  Conservatives complain my proposed tax rates are too high.  I agree.  Let’s reduce loopholes and lower government spending.  But the GOP doesn’t want to do this.  And that means we need much higher tax rates than Singapore.  All that Medicare spending and military adventurism and no-child-left-behind from the Bush administration must be paid for.

Their second mistake is to confuse consumption tax rates with income tax rates.  Yes, a 50% income tax rate for the rich is too high.  Hell a 1% income tax rate for the rich is too high.  But a 50% marginal consumption tax rate for the rich is not too high, given the amount of revenue we need to collect.  Also recall that the rich don’t pay payroll taxes above about $120,000 or so, and they pay relatively little tax on gas, booze, cigarettes, etc.  But again, convince the GOP and Dems to reduce the size of government, and I’m all for lower MTRs.

Another mistake is to complain that some plans are hard to enforce, because of tax evasion.  Yes, but that’s equally true of YOUR plan.

1.  If we go the wage tax route, tax should be paid on all cash and financial assets you receive from the company you work for.  Period.  If you’ve paid taxes on the fair market value of company stock that you get in year one, then no more tax should be paid if the stock later appreciates.  I understand that people will look for loopholes AS THEY ALREADY DO, but the IRS needs to do the best job it can.

2.  If we go the VAT route, then you must distinguish between consumption and investment.  I propose all business meals be treated as consumption.  Ditto for company cars that can be used off hours.  For air travel, it should be the difference between actual cost of travel and an economy class ticket.  The extra luxury is consumption.

Arguments over “who pays” are usually ill informed.  People simple assume that just because big corporations write out checks to the IRS, that corporations must be bearing the burden of the corporate income tax.  Well cigarette companies write out big cigarette excise tax checks to the government, does than means smokers don’t pay? The fact is that no one knows who ultimately bears the burden of the corporate (and to a lesser extent personal) income tax.

In a better world both parties would agree on an efficient tax regime, and then fight over progressivity.  When the GOP won elections they could cut taxes, and when the Dems won elections they could raise taxes.

In a better world.

 

Will the Fed undershoot its inflation target?

Justin Wolfers has a good piece in the NYT, with a graph showing the current values of some inflation derivatives:

Screen Shot 2015-03-07 at 6.25.23 PMThe numbers actually represent ranges. Thus the 49% chance of 2% inflation means that there is a roughly 49% chance of inflation between 1.5% and 2.5%.

If we assume a bell-shaped distribution, I’d guess the median inflation estimate is around 1.75% or a bit more.  In that case there’s roughly a 66% chance that inflation will undershoot 2% over the next 5 years.  But keep in mind that this is a CPI inflation prediction market.  And the Fed actually targets PCE inflation, which runs about 0.35% below CPI inflation.  So the market currently expects about 1.4% PCE inflation over the next 5 years.  Alternatively, there is an 80% chance that inflation will undershoot the Fed’s PCE target over the next 5 years.

Does that mean money is too tight?  Not necessarily, as the Fed has a dual mandate, and employment is likely to be above average over the next 5 years (albeit only because the previous 6 were so horrible.)   Nonetheless, I’d guess that dual mandate considerations would call for no less than about 1.8% PCE inflation over the next 5 years.

Even worse, the dual mandate defense of the Fed implies they should have had inflation run above target during the high unemployment years, and of course they’ve done exactly the opposite.  So if you take the Fed’s unwillingness to run a countercyclical inflation rate into account, the current situation is even more indefensible.

Even worse, the Fed seems unaware of the fact that the current policy regime is broken, and needs to be replaced before we again slide to zero interest rates in the next recession.  Reading the 2009 transcripts, (which just came out) was a sobering experience.  The Fed pats itself on the back when it produces stable NGDP growth (as in the Great Moderation), or 2% inflation since 1990.  But when they screw up and produce a macroeconomic disaster, they discuss the situation as if it’s not their job to steer the nominal economy.   Bad things just sort of happened.  It reminds me of the transcripts from late 1937, when the Fed was unwilling to accept the fact that the higher reserve requirements (which raised interest rates by 25 basis points) contributed to the double dip depression, even though the policy was enacted to prevent inflation, and that can only be done by restraining AD.  (BTW, I’ve complained about this asymmetry for years, as has Christy Romer, and as did Milton Friedman many decades ago.)

I haven’t even come close to reading all the minutes; if any of you have more time than I do see if there is any soul searching about the foolish decision to not cut interest rates in the meeting after Lehman failed.  Or regret over the decision instituting a contractionary IOR policy in October 2008.  I was especially disappointed with Bernanke’s support for ending QE1 in late 2009, partly on the grounds that further purchases ran the risk of leading to excessive inflation.

Vaidas Urba directed me to this Bernanke comment from the April 2009 meeting:

The other perspective, however, which I think is very important and a number of people pointed out, is the medium-term constraints and dynamics that affect the economy. Unfortunately, our economy still has a significant number of very serious imbalances that need to be resolved before it can grow at a healthy pace. Just to list five. First, the leverage issue of both the financial and the household sectors. Second, wealth–income ratios are well below normal, and therefore more saving is needed to rebuild those ratios. Third, we have dramatic fiscal imbalances, which have to be reconciled at some point. Fourth, we have current account imbalances, which are at least temporarily down, but the Greenbook forecast for the medium term is that there is probably some worsening in that dimension. And fifth, as a number of people mentioned, the unemployment we are seeing is probably not mostly a temporary-layoff type of unemployment. There is a lot of reallocation going on. The financial and the construction sectors are probably not going to be as big in the future as they have been recently, so there will need to be that readjustment across sectors.

If you put all of those imbalances together and you think about what is going to support sustainable economic growth, it is a little hard to see where a robust recovery is going to come from.

How about from the Fed?

Seriously, whenever you are in a deep global slump it NEVER looks like the various components are likely to generate growth.  Why would hard up people fearing job loss consume more?  Who will we export too?  Why would firms invest when sales are slow? That was even more true in April 1933, when FDR devalued the dollar and caused industrial production to rise by 57% in 4 months.  And it was true in December 1982, right before NGDP grew at an 11% rate over 6 quarters.

In retrospect it is obvious the economy needed more NGDP in 2009, and that the Fed needed to make it happen.  But they didn’t see it.

PS.  Not to pick on Jeffrey Fuhrer, who is a fine economist, but this seems slightly off the mark:

The US inflation rate is about 1.5 percent a year, below the Federal Reserve’s 2 percent target. Too-low inflation, Fuhrer said, indicates that not all factories and businesses are humming, and more people are unemployed.

“It’s just a symptom of a poorly functioning economy that’s under capacity,” he said.

Here are some things to consider:

1.  Fuhrer is an executive vice president and senior policy adviser to Boston Fed president Eric Rosengren.

2.  The Fed is targeting inflation at 2%.

3.  The Fed is very likely to raise interest rates in the near future, which (in theory) suggests that inflation is either where they want it, or a bit too high.

Instead of saying 1.5% inflation is a “symptom of a poorly functioning economy” I’d rather he say it’s a symptom of a poorly functioning monetary regime.

PPS.  I was asked about slowing NGDP growth in Australia.  From the NGDP numbers it seems like policy is a bit too tight, but then one must also consider distortions caused by commodity price swings.  However Rajat sent me the following:

Australian workers, used to fairly solid wages rise each year for the past two decades, are faced with an economy unable to deliver the types of increases many expect.

.   .   .

The ABS reported that wages grew 0.6%, as expected but this left year on year growth at just 2.5% for 2014.

That’s only a slight dip on the recent 2.6% yoy growth rate but 2.5% is a fresh low for this wage price index series which dates back to 1997.

I’m reluctant to criticize the excellent RBA, but they do need to ease policy a bit.

PPPS.  The Boston Globe also said this about Fuhrer:

Fuhrer, a father of three adult children, lives with his wife in a historic farmhouse in Littleton. He also participates in Revolutionary War battle reenactments as a member of the Boxborough Minutemen, where he learned to play the fife.

Don’t raise rates until you see the whites of inflation’s eyes.

Who’s afraid of the great outdoors?

At age 59 I’m discovering what makes people become reactionaries as they grow older. You see cultural change and miss the culture of your youth.  Today I’ll talk about the outdoors, which seems to be gradually receding in importance.

When I was in high school I used to take off Tuesday and Thursday afternoons to going biking in the countryside.  When I reached my 30s I began to hear stories of students doing extracurricular activities just to get into good colleges.  It seemed like the most ridiculous thing I’d ever heard of.  Free time was for play.  In 1972 we were actually told NOT to study for the SATs.  Even 8 years ago I used to go on long walks in the late afternoon, looking at the wonderful residential architecture in Newton.  Now I spend almost all of my time indoors, in front of the computer.  I wonder if this is increasingly true of society as a whole.

When I was young I viewed my (boomer) generation as much healthier than my parents’ generation.  Middle age people had no interest in biking, jogging, health foods, etc.  And yet it was our generation that became obese, not them.  I recently did a post on a tropical paradise that no one wanted to move to.  Back in the 1960s and 1970s there was a real back to nature movement, where hippies idealized a cabin in the woods.  Now it’s back to the inner cities.

Tyler just linked to an article about the rapid decline in golf:

The game — with its drivers, clubs, shoes and tee times — is expensive both to prepare for and to play. It’s difficult, dissuading amateurs from giving it a swing, and time-consuming, limiting how much fans can play. Even what loyalists would say are strengths — its simplicity, its traditionalism — can seem overly austere in an age of fitness classes, extreme races and iPhone games.

Graph the rise of the iPhone against the decline of golf.  I know this is going to sound strange, but I found the following bit in The Economist to be incredibly depressing, one of the saddest things I’ve read in years:

But overall, a pastime dominated by older, white, rural men is on the wrong side of demographic forces upending so many aspects of American life, from pop culture to politics. And it is not just grey hair that worries those in charge of the sport.

Wisconsin, a hunting-mad corner of the Midwest, makes a good case study. Wildlife officials there joke that folk in their state revere God, the Green Bay Packers football team and deer-hunting, and not necessarily in that order. At the peak of the season, on the weekend before Thanksgiving, 100,000 white-tailed deer may be killed in Wisconsin’s woods. The state offers ponds thick with duck, soft southern dairylands full of game, and—in the north—wilder woods where bear and wolves prowl.

Yet even in Wisconsin there has been a 10% drop in licences to hunt deer with guns since numbers peaked in 2000. Worse is to come. A recent state-sponsored demographic analysis predicts a 27% fall in gun-licence sales over the next 20 years.

The trend that most troubles Wisconsin officials is a sharp loss of interest among middle-aged, male deer-hunters. They used to be the bedrock of hunting, recruiting their children into the sport and heading into the woods for an annual “deer camp” in autumn: they would meet up with fathers, brothers and cousins for a week of shooting, beer-drinking, card-games and tall tales round the campfire. In 2012 the state’s Department of Natural Resources (DNR) commissioned an academic study of Wisconsin hunters who had stopped buying gun licences, involving thousands of questionnaires and multiple focus groups. Behind its unpromising title—“Why fewer middle-aged gun-deer hunters bought licences in 2010 and 2011”—lurks a novella’s worth of familial angst and male soul-searching.

A divorced father sees his children every other weekend: he is not about to park them with a babysitter just to go hunting. The economic and social power of wives is much discussed: the days are gone when men could head to the woods for a week without a qualm, confident in their supreme authority as breadwinners. The anonymous quotes ring with hurt, guilt and bafflement: the sound of men struggling with a world that has turned maddeningly complex and touchy-feely. Hunters describe Chekhovian family rows—pitting young against old, insiders against newly arrived in-laws—over who got to shoot which deer, one mournfully reporting that at the end, “The ladies all hollered at me.”

I grew up in Wisconsin and recall many very thoughtful, kind, highly intelligent deer hunters.  And yet it’s clear to me that history is written by the winners, and that hunters will lose in the end.  The urban sophisticates will mischaracterize them as drunken yahoos.  Even worse, the state I remember growing up in is gradually disappearing.  I used to tell people that Wisconsin schools NEVER close due to cold or snow, and that we’d walk 2 miles to school in 20 below zero weather (28 below C).  But now I’m told even Wisconsin occasionally closes it schools.  People used to be very friendly—since Scott Walker people stopped have talking to their neighbors.

Notice that one factor in the decline in hunting is that dads need to be with the kids. What happened to kids playing on their own, as we did?  This is what happened:

A slim majority of Americans, 53 percent, say it is okay for 12-year-old children to play at a public park without adult supervision. Women are 12 points more likely than men to say 12-year-olds should be supervised at public parks. And majorities of households with incomes less than $30,000 a year (56 percent) and Americans with a high school education or less (52 percent) think government should require 12-year-olds to be under supervision. In contrast, nearly seven in 10 of those making more than $90,000 a year, and 67 percent of college graduates say supervision isn’t necessary.

I’m not sure which is more mindboggling, that 47% of parents think 12 year old kids shouldn’t be able to play in a park without adults, or that the “helicopter parent” phenomenon is most prevalent among low income people.  By the way, 68% think it should be illegal for 9 year olds play in a public park without adult.  Who are these people?  I’ve meet a couple families from Europe that just roll their eyes at American attitudes toward children being left alone.

[As an aside, I’ll bet that poll questions of “should people do X” and “should people be legally allowed to do X” would generate very similar numbers for a wide range of issues, even though the questions are radically different.  That’s one reason I don’t trust public opinion polls.]

Where I live in Newton I see almost no children out playing, but they do all have smart phones.  My daughter’s relationship with the outdoors is so different from what mine was that she might as well be growing on a different planet.  Just to be clear, I’ve always believed it’s up to the young to run the planet as they wish, and that the older generation should step aside and let the culture change.  I’m glad the younger generation has embraced things like gay marriage.  I mourn the loss of the old way of interacting with nature, but I don’t want to try to stop change.

One lesson here is that many of the things you hold dear, including moral values, will be rejected by future generations.  Just as the views of older people toward gay marriage now seem neanderthal, the views of young hip urban liberals will seem hopelessly reactionary a century from now.  The lesson is that we should be less condescending toward people with different views.  As a general rule, conservatives look down on people living in different parts of the world, whereas liberals look down on people who lived in the past.  Both are understandable but regrettable forms of bigotry. Just remember that future people might look down on your enjoyment of watching a Redskins football game while eating a bbq pork sandwich just as much as you look down on hunters, and just as much as the hunters I knew looked down on 19th century men who thought that dueling was a respectable way to settle disputes.

Hey, it was their world, not yours.

PS.  I strongly dislike the way that many upper class intellectuals (on both the left and right) tell us what is “wrong” with working class culture.

PPS.  And no, the crime rate was not lower back then.

Update:  After writing this I came across Karl Knausgaard being asked about his children:

Are you optimistic about the world they’re growing up into?

Yeah, I do. There is a German writer who said that every generation has the key to their own time, which I think is true. It’s exciting to just send them out into the future – and then it’s up to them, really.

HT:  Gordon

Rubio-Lee is great, so why not make it even greater?

If the tax reform proposal of Rubio and Lee were to pass it would easily be the best thing the Federal government has done since the civil rights laws of the 1960s.  And yet we see the usual suspects like Jonathan Chait trashing the bill.  Instead Chait should have said that with one tweak the bill would be awesome, and Dems like Elizabeth Warren should be racing to support the general idea.  I’ll get to the minor tweak in a moment, but first some of the good things it does:

1.  Ends the marriage penalty.

2.  Ends the taxation of capital income.

3.  The corporate tax becomes based on income earned in the US, (which is the approach used by most other countries.)  The rate would be similar to European tax rates.  Interest would no longer be expensed.  (Recall that interest income is no longer taxed (point #2), so it balances out.)

4.  Capital investments are expensed, no depreciation schedules.

5.  Ends most itemized deductions.

6.  AMT eliminated.

I haven’t been this excited since I was single!

Is it perfect?  No, there’d still be deductions for health insurance and mortgage interest and charitable deductions. However their statement says those issues also need to be addressed.  They should also treat everyone as single, to end the marriage bonus.

Under Rubio/Lee, someone like me with no mortgage would have the following 1040:

Wage income minus charitable contributions = taxable income.

That’s it.

The tax code would no longer hammer savers and married people.  It basically turns the income tax into a progressive consumption tax.  Isn’t a progressive consumption tax what liberals have been calling for?

Now for the supposed flaws.

1.  It’s not progressive enough.

2.  It doesn’t raise enough revenue.

There’s a very simple fix for both problems—add a third bracket!  The proposal calls for a 15% rate up to $75,000, and 35% above that level (or above $150,000 for couples.)  Simple solution—add a 50% rate for income above $250,000 (or $500,000 for married people.)

A note on progressivity:

Liberal arguments on the progressivity of various tax changes are basically worthless. Ignore everything you read, as they are using “income” as the benchmark of economic well-being.  Thus suppose I earn $100,000 a year for 20 years, and then sell my house for a capital gain of $500,000.  (I live in a two family, so I must pay taxes on the gain.) Liberals would have you believe I am suddenly “rich” in the year of the sale, with an income of $600,000.  That’s nonsense for two reasons.  The actual gain occurred gradually over 20 years.  And adding wage and capital income is as nonsensical as adding blueberries and apples, and calling it the number of “fruit.”  Taxes on capital income are double taxing the same earnings.

Conservatives might complain that a 50% top rate is too high.  The current top rate is 43.4% (don’t believe the liars who claim it’s 39.6%.)  But that is the top rate for an income tax system.  Rubio and Lee are proposing that we switch to a consumption tax system.  Consumption is less than income, especially for the rich, or should I say the “rich.” (How much will I consume the year I finally sell my house?  Not $600,000.)  So the top rate should be higher with any switch to a consumption tax.  Indeed you can argue that people with consumption levels in the $100s of millions per year should face an even higher tax rate.  And don’t tell me they “deserve” the 500 yachts earned through legal barriers to entry like intellectual property laws, there is no such thing as “deserve” in a cold heartless universe composed of nothing but subatomic particles, where most people are born into peasant families in places like Nigeria and Bangladesh.  If conservatives won’t be hardheaded realists, who will be?

Yes, I’d prefer a lower set of tax rates.  I wish our total government spending were 20% of GDP, like the 4 Asian tiger economies, not the 35% to 40% we seem stuck with.  I wish we’d eliminate the tax deductibility of mortgage interest and health insurance, which would allow for lower rates than what I’m proposing.  Ideally the government would simply withhold income taxes, like they do with the payroll tax.   No 1040 forms to fill out.

The other potential flaw in Rubio and Lee is business/self-employed income, and especially preventing tax avoidance.  An alternative way to a progressive consumption tax would be to treat all savings and investment in a 401k-type structure, taxing income only when it is consumed.  That would make it much harder for the hedge fund guys and the self-employed to avoid taxes.

PS.  I have a new post on inequality at Econlog.

HT:  TravisV